Key Takeaways
- Futures strips involve buying or selling futures contracts for consecutive delivery months as a single transaction.
- Future strips are popular in energy markets.
- They help secure prices over a set period, reducing frequent contract renewals and related costs, serving for both hedging and speculative purposes.
- Options on futures strips provide a tool for traders to hedge or speculate on future commodity price movements.
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What Is a Futures Strip?
A futures strip involves buying or selling futures contracts for consecutive delivery months in a single transaction. It’s commonly used in the energy market, especially for natural gas.
A futures strip allows traders to lock in prices over a set period, reducing the need to renew contracts frequently. This approach can lower costs and reduce risks. It’s used for both hedging against price swings and speculative trading in commodities.
How to Use Future Strips in Commodity Trading
Futures strips are typically used to lock in a specific price for a targeted time frame, which can be quite useful from an operation’s point of view. For example, a futures strip could be bought to lock in a specific price for natural gas futures for a year with 12 monthly contracts connected into a strip. The average price of these 12 contracts is the specific price that traders can transact at, and can be an indicator of the direction of natural gas prices. Traders also speculate on energy through exchange traded funds (ETFs).
An investor might use a futures strip to lock in natural gas prices for a year instead of buying new contracts each time a shorter one expires.. Depending on the market, rolling over the trade can generate higher trading costs and even negative cash flows if the next futures contract is more expensive than the one that is expiring (contango).
Futures strips are frequently traded in the energy market and there are even options on strips. Traders use them to hedge and speculate on future price movements in oil, natural gas, or other commodity markets. A futures strip is sometimes called a “calendar” strip and can be held long if an investor is hedging against (or speculating on) rising prices in the underlying market, or held short if the investor is hedging against (or speculating on) falling prices in the underlying market.
Fast Fact
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The Bottom Line
A futures strip streamlines trading by combining multiple monthly futures into one transaction, offering efficiency and price stability over time. Widely used in energy markets like natural gas, it helps traders hedge against price volatility or speculate on market trends. By locking in prices across several months, participants can better manage risk and avoid the costs of repeatedly rolling over contracts.